Don’t Listen to Greg Weinstein

In the 2000 movie release “Boiler Room” Greg Weinstein (in)famously talked about how to sell stocks to women. His advice? Don’t.

“We don't sell stock to women. I don't care who it is, we don't do it. Nancy Sinatra calls, you tell her you're sorry.” – Greg Weinstein

While I’m not on a Hollywood big screen, I am here to tell you this: Greg Weinstein is a moron.

Let me give you a few facts about women, wealth and investing.

• Studies have shown that women control 51.3% of personal wealth, and that number is expected to grow to 66% by 2030;
• U.S. women are an economy equal in size to the entire economy of Japan;
•  Women make up 47% of the top wealth holders in the U.S.;
• Women are either the sole decision maker or an equal decision maker in up to 90% of high net worth households;
• A 2014 MainStay Investments study showed that 89% of women who had invested in alternatives had a positive experience and that 27% of women (compared with 20% of men) are looking towards alternative investments; and,
•  High net worth women are more likely to invest in alternative investments. According to a 2015 CNBC article women are “three times more likely to invest in hedge funds, venture capital and private equity and twice as likely to invest in commodities and precious metals.”

Affluent women are a powerful and growing force in the alternative investment investor landscape.

According to a 2014 Preqin report, high net worth investors account for 9% of hedge fund investors by type and 3.6% of the total assets in hedge funds. For many emerging hedge funds, high net worth investors comprise up to 100% of their assets under management. High net worth investors are therefore a critical part of the alternative investment investor-verse.

One final fact: Preqin released statistics on Monday showing that assets under management in alternative investments (including hedge funds, private equity, real estate, private debt and infrastructure) has grown to $6.9 trillion dollars.

If high net worth investors account for 3.6% of the AUM in alternatives, then nearly $250 billion of all alternative investment assets come from their pockets.

If women are sole or equal decision makers in 90% of high net worth households, then women control or influence nearly $225 billion of alternative investments.

As managers struggle to raise assets, as RIAs and CFPs look for new clients, as first funds look to launch, there should be a concerted effort to integrate this significant segment of the investor-verse. Failure to do so is not just short sighted, it’s also business-limiting.  

If you haven’t started thinking about how you can attract female investors, it’s time to start. I attended a women and wealth conference in New York last week. There were only three men in attendance. One was a speaker. One worked for another speaker. I didn’t get a chance to meet number 3, but suffice it to say that, based on my experience last week, it seems the emerging market that is women is continues to be overlooked by the financial services industry.

Wake up, y’all. Greg Weinstein was wrong.

Sources: Fara Warner: “Power of the Purse” & the American College of Financial Services, IRS, Bank of America Merrill Lynch, CNBC, Preqin)

#SaveTheEmergingManager

Recent asset flow patterns and fund closures reveal that small (and new) hedge funds may be on the endangered species list. Recent data shows that funds need at least $250 million to break even, and even that may not be enough to successfully run a business. But if small hedge funds go the way of the dinosaur, what happens to structural alpha? Will niche investments, club deals and micro-caps be permanently overlooked? Where will investors look for outsized returns and differentiated portfolios?

Recent asset flow patterns and fund closures reveal that small (and new) hedge funds may be on the endangered species list. Recent data shows that funds need at least $250 million to break even, and even that may not be enough to successfully run a business. But if small hedge funds go the way of the dinosaur, what happens to structural alpha? Will niche investments, club deals and micro-caps be permanently overlooked? Where will investors look for outsized returns and differentiated portfolios?

New Year’s Resolutions for Investors and Managers (Part Deux)

Last week I directed everyone’s post-holiday attention to making New Year’s Resolutions for investors. Now that everyone has had a week to digest those mantras, get over the soreness you inevitably felt after hitting the gym (for the first time in 12 months) diligently, and have balanced your ketones after a week of low-carb, New Year dieting, I thought it best to turn attention to resolutions for money managers.  If you missed last week’s post, you can find it HERE. For those of you still looking to make a few investing resolutions for 2015, read on.

Money Manager Resolutions:

I resolve to create a business plan around capital raising – Raising and maintaining assets under management has perhaps become as critical as performance. Don’t believe me? Look at recent fund closures. Paul Tudor Jones just announced the shuttering of his longest standing fund, which at $300 million was absorbing a disproportionate amount of firm resources. Merchants Gate, which peaked at $2.3 billion in AUM, decided to close as assets shrank to $1.1 billion, despite above average performance. Woodbine Capital closed after assets dipped to $400 million. Indeed, during the first half of 2014, Hedge Fund Research (HFR) reported that 461 funds closed, which was on pace to equal or exceed the worst year on record for hedge fund liquidations: 2009.

While many people believe that hedge funds “fail” in a blaze of glory a la Amaranth or Galleon, most hedge funds die a death of 1,000 cuts, either never gaining enough performance traction or amassing enough assets to create a sustainable business. According to a 2012 Citi Prime Services report, hedge funds now need between $250 million and $375 million just to break even, and the relatively large closures listed above make me believe the number may be closer to the higher end of that spectrum.

So, with ten hedge fund firms accounting for 57 percent of asset flows in 2014, what’s a fund to do? At the very least, make a plan. If I’ve said it before, I’ll say it again: Your capital raising efforts should be executed like Sherman marching through Georgia in 2015.

We all talk about the “business and operational risk” in hedge funds, and I, for one, would include an effective capital raising (and retention) strategy as one of those risks. Without an effective asset raising campaign, a hedge fund manager may have to:

1)   Spend more time on capital raising, potentially taking time away from generating strong performance;

2)   Worry more about redemptions. Any redemption payouts will likely have to be liquidated from the active portfolio, potentially compromising returns;

3)   Lower the investment minimum so investors will invest (and not be too large of a percentage of the fund). Sure, more investors is great, but client communications will also take more time;

4)   Constantly assuage investor (their own and their employees) fears about the long-term sustainability of the fund.

In 2015, make a plan for capital raising. Pick three to four conferences with a high concentration of potential investors and really work them. Get on the speaking faculty. Get the attendee list in advance and set up meetings before you arrive. Have great materials available. Practice your elevator pitch. After the event, have a plan for follow up. Write great investor letters. Polish your performance template. Host a webinar on your strategy. Hire a writer/capital raiser/graphic designer or whatever you need to fill in the gaps. People are already predicting 2015 will be a worse year for hedge fund closures – Let’s prove folks wrong. 

(NOTE: This does not mean I don't think there is still a place for small, niche funds. If a manager is content and profitable and generating returns smaller, that's fantastic, and needed in the industry). 

I resolve to find my own niche, but not tell everyone I’m the only one there – If I read the words “Our competitive advantage is our fundamental, bottoms-up [sic] stock picking” one more time, I will put out my own eye with a pencil. It’s very hard for a traditional stock picker to demonstrate alpha right now, so you must find, demonstrate and articulate an edge.

The fact is, many of the investors to whom I speak have vanilla investing covered. Whether it’s equities, private equity or credit, if it ain’t something they can’t do themselves, they aren’t likely to invest. If you do something really unique or spectacularly well, make sure you highlight that in every conversation and in all of your marketing efforts. For example, I’ve seen managers with great equity strategies market themselves as simple long/short funds, when in fact there is much more meat in their burger. Don't hide your light under an anemically worded bushel.

With that being said, I think if I hear “I am the only one who is long ________ now” one more time, I will poke out my eardrums with a number two pencil. Hubris is never attractive, and it can result in some spectacular losses. Just ask Long Term Capital Management.

At the end of the day, you often need other folks to figure out the equation (although preferably after you do) in order for your ideas to generate returns. If no one else ever unearths your undiscovered company, or piles into energy, or gets on your disruptive bandwagon, you’ll end up holding a nice position at par for a really long time. Not as attractive, eh? Explain why you're early in, but also why others will eventually get the memo for the best results.

I resolve to stick to my guns – This one may be tough. With the amount of pressure on money managers to outperform, avoid all losses, lower fees and generally walk on water, it can be hard to stay with a strategy that hasn’t been shooting the lights out, hold the line on fees to protect a fund’s long-term viability or not branch into strategies where expertise may be lacking. It’s also a fine line between maintaining conviction and riding an idea or stock to the bottom. For the most part, trust what you know. Explain when you have to. But always at least listen to what others and your intuition are telling you. 

Wishing all of us a safe, happy and prosperous year!

New Year’s Resolutions for Investors & Managers (Part One)

As we enter 2015 refreshed from vacations, overstuffed with tasty victuals and perhaps even slightly hung-over, it’s time for that oh-so-hopeful tradition of New Year’s resolutions. Many of you probably resolved to spend more time with your family, eat better, exercise more, floss daily, or to give more to charity. Despite what the research says, some of those resolutions may even stick. So before the holiday afterglow completely fades, I would like to turn attention to some investing resolutions, designed to bring more (mental) health, wealth and happiness in 2015. Without further ado, here are my top three New Year’s resolutions for investors. (Due to the length of this post, I’ll cover money manager New Year’s resolutions in next week’s blog.)

Investor Resolutions for 2015

I resolve to not confuse absolute and relative returns – When you profess to want “absolute returns” you do not get to invoke the S&P 500 in the same breath. In 2014,  “absolute return” came to mean “I expect my investments to absolutely beat the S&P 500” or “My investments absolutely cannot lose money (or I will redeem them at my first opportunity).”  

Absolute returns actually means you make an investment in an asset class or strategy and then you judge whether you are happy with those returns based on absolute standards. Did the strategy perform as expected, based on returns, volatility, drawdown, and/or diversification? Do I still believe in this strategy or asset class going forward? If there was a loss, do I believe this is a substantial, long-term problem or is this a buying opportunity? Trying to turn absolute investments into relative investments after the allocation fact causes a lot of knee-jerk investment decisions, leads to return chasing and, ultimately, underperformance.

I resolve to not get tied up in my investing underpants – This probably needs some explanation because I do not want any of my blog readers to Google “tied up in underpants”  - the answers you get will absolutely not be suitable for work.

Instead this (quaint?) colloquial saying basically means that you shouldn’t get so wrapped up in perfecting the small things (underpants) that you can’t get to the big stuff (getting dressed and leaving the house).  For example: “That meeting was worthless. We spent all morning tied up in our underpants about where to get lunch and we didn’t address the sales quotas.” For non-Tennesseans, the less colorful turn of phrase would involve forests, trees and all that.

When it comes to investing, there are any number of “underpants issues” with which to deal. Fees are a great example. Every time someone wants to argue with me on Twitter about alternative investments, they inevitably start with “You don’t have to pay 2%/20% to [get diversification, manage volatility, achieve those returns, etc.]."

It’s always interesting to chat with these folks about what they think an appropriate fee structure would be. Most people say they are willing to “pay for performance.” And in fact, perhaps with the exception of investments into a small number (less than 500) of “billion dollar club” funds, you are.

Since more than half of all funds have less than $100 million in AUM, it’s pretty difficult for the bulk of funds to get rich from a management fee alone. Management fees tend to be, on average, around 1.6%. In comparison, mutual funds charge between 0.2% (index funds) and 2% in management fees, with the average equity mutual fund charging, according to an October 6, 2012 New York Times article, around 1.44%. Not that different, eh? As for the incentive fee, that only gets paid if the manager makes money. It’s designed to align interests (“I make more if you make more”), not steal from the “poor” and give to the rich. Perhaps a hurdle makes sense, but why dis-incent a manager entirely?

At the end of the day, this laser focus on fees hampers good investment decision-making. We run the risk of focusing too much on what we don’t want others to have than on what we might get in return (diversification, a truly unique or niche strategy, reduced volatility, expertise, returns). We run the risk of negative selection bias (with managers and with strategies) if we choose only low fee funds. We also risk dis-incentivizing smaller, niche-y and more labor-intensive start-up funds, which could completely homogenize the investment universe.

Is there room for fee negotiation? Of course. I am a big proponent of sliding scales based on allocation size or overall AUM. However, making fees your sole decision point is, I believe, penny wise and pound foolish over time and will leave you, well, tied up in your underpants.

I resolve to take a holistic approach to my portfolio – Say this with me three times “I will not chase returns in 2015. I will not chase returns in 2015. I will not chase returns in 2015.”

Why should auld performance be forgot? Let’s look at managed futures/commodity trading advisors. It hasn’t been an easy ride for macro/futures funds. In 2012, they were the worst performing strategy according to HFR. In 2013, they were edged out of last place in HFRs report by the Barclays Aggregate Bond Index, but still under performed all other hedged strategies. The last two years saw heavy redemptions, with eVestment reporting outflows from Managed Futures funds for 26 of the last 27 months.

And in 2014? Managed Futures killed it.

Early estimates from Newedge show that Managed Futures funds returned an average of 15.2% in 2014. January 2015 predictions are that Managed Futures will either win or place amongst top strategies for 2014.

It’s always tempting to dress for yesterday’s weather, but savvy investors look not just at what’s performed well, but where there are future opportunities and potential pitfalls. Even an up-trending market, maybe especially in an up-trending market, it’s important to look to out-of-favor and diversifying strategies, niche players and contrarians to create a truly “all weather” portfolio.

Stay tuned for money manager resolutions next week, and in the meantime, best wishes for a Happy Investing New Year.

In Case You Missed Them - 2014 Blogs By Topic

In case you missed any of my snappy, snarky blogs in 2014, here is a quick reference guide (by topic) so you can catch up while you gear up for 2015. My blog will return with new content next Tuesday – starting with my "New Year’s Resolutions for Managers and Investors."

“How To” Marketing Blogs

http://www.aboutmjones.com/blog/2014/12/8/anatomy-of-a-tear-sheet

http://www.aboutmjones.com/blog/2014/11/12/emerging-manager-2015-travel-planner

http://www.aboutmjones.com/blog/2014/10/21/conference-savvy-for-investment-managers

http://www.aboutmjones.com/blog/2014/9/11/ten-commandments-for-pitch-book-salvation

http://www.aboutmjones.com/blog/2014/7/18/emerging-managers-the-pitch-is-back

Risk

http://www.aboutmjones.com/blog/2014/11/10/look-both-ways

http://www.aboutmjones.com/blog/2014/11/3/the-honey-badger

General Alternative Investing

http://www.aboutmjones.com/blog/2014/10/25/earworms-and-investing

http://www.aboutmjones.com/blog/2014/10/7/alternative-investment-good-newsbad-news

http://www.aboutmjones.com/blog/2014/9/17/pay-what

http://www.aboutmjones.com/blog/2014/7/21/investing-and-the-law-of-unintended-consequences

 “The Truth About” Animated Blogs – Debunking Hedge Fund Myths

http://www.aboutmjones.com/blog/2014/10/13/the-truth-about-hedge-fund-correlations

http://www.aboutmjones.com/blog/2014/9/6/the-truth-about-hedge-fund-performance

http://www.aboutmjones.com/blog/2014/8/8/the-truth-behind-hedge-fund-failures

Diversity Investing

http://www.aboutmjones.com/blog/2014/12/8/getting-an-edge-in-private-equity-and-venture-capital

http://www.aboutmjones.com/blog/2014/11/21/the-simple-case-for-emerging-managers

http://www.aboutmjones.com/blog/2014/9/29/mi-alpha-pi-a-look-at-the-sources-of-alpha

http://www.aboutmjones.com/blog/2014/7/21/affirmative-investing-putting-diverse-into-diversification

Private Equity and Venture Capital

http://www.aboutmjones.com/blog/2014/12/8/getting-an-edge-in-private-equity-and-venture-capital

Emerging Managers

http://www.aboutmjones.com/blog/2014/11/21/the-simple-case-for-emerging-managers

http://www.aboutmjones.com/blog/2014/11/12/emerging-manager-2015-travel-planner

http://www.aboutmjones.com/blog/2014/9/29/mi-alpha-pi-a-look-at-the-sources-of-alpha

http://www.aboutmjones.com/blog/2014/8/25/submerging-managers

Happy Holidays!

Wishing everyone a joyous and happy holiday season in whatever flavor you prefer. May 2015 bring everyone nothing but the best things in life.

Anatomy Of A Tear Sheet

Having been an investor, a PerTrac employee and a general statistics nerd, I have seen more than my share of performance tear sheets. While some people think of them as unnecessary, I can tell you that a good performance tear sheet can help make the case for an investment in your fund, and can also highlight why an investor should should stay with your fund through tough times. Make no mistake: A strong tear sheet isn't optional. 

Logo - Your entire marketing toolkit, including your tear sheet, needs a look and feel. This is no longer optional. If you want to compete in this industry, your fund has to look like it's part of a viable, successful, long-term business. This ain't the days of two guys and a Bloomberg terminal. If you don't have a logo, get one. And with logos available for under $1,000, there are really no excuses on this front.

Contact information - You would be shocked to see how many folks have no contact info on their materials. People can't invest if they can't find you. Include the contact person's name, email, address, phone, website, Twitter handle and all other pertinent information.

Strategy description and monthly commentary - The strategy description SHOULD NOT say "Our goal is to provide attractive risk adjusted returns over a three to five year period." It should actually say what you do. If there is room, you should have a few sentences about the current month's performance as it relates to your strategy as well. This will not replace your monthly letter to investors, but it will help put the numbers folks are looking at into perspective.

VAMI Chart - a simple Value Added Monthly Index (mountain) chart versus appropriate benchmarks helps people visualize how the fund performs.

Another compelling chart - Depending on the strategy goals and attributes, this could be an up and down market outperformance graph, an underwater chart, correlation analysis, etc. The goal is to visually demonstrate to investors that your fund delivers on its promises (protect in down markets, provide uncorrelated returns, limit drawdowns, etc.)

Monthly and annual returns - Uh, monthly and annual returns. NET OF ALL FEES

Peer ranking - Shows how you do against other funds like you.

Risk/reward table - includes the relevant statistics (CAR, standard deviation, Sharpe, Sortino, maximum drawdown, etc.) versus relevant benchmarks.

Top holdings or attribution - Some type of granularity into the portfolio make-up. Solidifies the strategy in people's minds.

Manager bio - People invest in people, not vehicles. Don't miss this opportunity to connect.

Terms and service providers - If people don't know when they can get in and out of your fund, your fees, your partners (service providers), it's hard to invest.

Explanatory notes - Go to a second page (or the back of the page) if necessary. Do not squish everything else (or make tear sheet sacrifices) to fit in what can be lengthy explanatory notes.

Of course, you don't have to follow this layout exactly, but these elements should be included in some way, shape, form or fashion on any useful and compelling tear sheet. Happy number crunching!

Getting an Edge in Private Equity and Venture Capital

My gym teacher in junior high was a woman named Mrs. Landers. While I truly hated gym, Mrs. Landers was a godsend to an uncoordinated nerd like me.

You see, Mrs. Landers didn’t put your entire gym class grade in one basket. You got 50 points (out of 100) from “dressing out.” By simply changing from my Molly Ringwald-esque garb into a grotty Northport Jr. High gym-suit, I could get halfway to the “A” I craved. The written test counted for another 20 points. “Hello passing grade!” And I hadn’t even broken a sweat. The last 30 points came from actual physical activity, and admittedly, those I struggled with. But volunteer to put up the volleyball net? Five points. Get Mrs. Landers a diet coke and bag of Frito Lays to eat while she supervised our Jane Fonda workouts? Two points. Inevitably by the end of the semester, I had secured an A in gym without ever hitting, catching or running with a ball.

Finding more than one way to skin a cat is often a recipe for success. Today, Private Equity (an altogether different form of PE) has $1.04 trillion of dry powder, the highest on record according to the Private Equity Growth Council. As a result, there is a need to think creatively to ensure the best possible performance outcome for GPs and LPs alike. 

Cognitive alpha does exist in PE and in Venture Capital. There have been studies that show the excess return or alpha of women and minority owned firms in particular within the PE/VC space, although unfortunately there is a very small sample to study. Less than 1% of PE and VC firms are run or heavily influenced by women and minorities, along with less than 0.25% of the assets under management.  

And yet studies have shown that this small group “gets ‘er done.”

In one NAIC study of women and minority owned Private Equity, diverse firms delivered 1.5X return on investment versus 1.1X for non-diverse firms from 1998 to 2011. In the RK Women in Alternatives Study I authored in 2014, women-run PE firms outperformed the universe at large by one percentage point in 2013.

Now some would insert a best and brightest argument here: with such a small sample, isn't it only the best and brightest women and minorities that are able to rise through the PE and VC ranks to start a fund, causing the large return differential?

My answer is that I believe the reasons for outperformance go much deeper, well into the realm of behavioral finance. Two possible reasons for strong outperformance are pattern recognition and differentiated networks.

Pattern recognition – Even though our brains consume roughly 20% of the calories we take in, making it the greediest organ in our bodies, it is always looking for shortcuts. One of the ways it conserves energy is through pattern recognition. We tend to look for patterns in data so we can make decisions faster. In PE/VC, that means we look for companies that look similar in some way to past successes, and place our bets with those. Women and minorities may be able to recognize different patterns, allowing for profitable investments that are more “outside the box.”

Differentiated networks – Women and minority owned or influenced firms may be able to find differentiated deals due to expanded or different networks. It’s true that anyone who goes a traditional route to PE or VC has some overlap of network (B-school, analyst training programs, etc.) but even subtle differences in network can lead to differentiated deals with less crowding and less competition.

These two characteristics may help women and minority owned and influenced PE and VC to excel in an environment with a tremendous amount of dry powder. It may also lead them down roads less traveled in PE and VC – towards minority and female founders. A recent McKinsey study of UK companies found firms in the top 10% of gender and racial diversity had 5.6% higher earnings while firms in top quartile of racial diversity were 30% more likely to have above-average financial returns. Both desirable traits in a PE or VC portfolio. However, those firms don’t generally fit into the traditional PE and VC mold, as evidenced by the fact that minority and female owned companies are 21% and 2.6% less likely to get funded, respectively, according to Pepperdine University.

In a world where there is a tremendous amount of dry powder, increasing interest in PE/VC from institutions and individual investors alike, and where returns are, as always, key, every advantage is important. For investors looking for that extra “je ne sais quoi,” women and minority owned or influenced firms may be the ticket. For PE and VC firms looking to get an edge on competitors, diversity hiring could be in order, because unlike my gym class, there are no points awarded for simply getting dressed every morning.

The Simple Case for Emerging Managers

When people ask me why I am such a passionate advocate for emerging managers, I sometimes wax a little poetic. But the fact is, after nearly 17 years in the alternative investment industry, I don't believe any investor can have a truly optimized or truly diversified portfolio without allocations to young, small, women and minority-run funds.

With 90% or more of asset flows going to the "billion dollar club" managers, it would certainly seem others don't share my enthusiasm. However, when you look at the different types of alpha, it seems clear why emerging managers should get more than a fair shake. I'm not advocating avoiding large, successful funds. But by ignoring emerging managers, investors risk removing two important types of alpha from their money management arsenal. 

(c) 2014 MJ Alternative Investment Research

With any size or age fund, or within any manager demographic, it is possible to find funds where alpha is generated by luck. The saying "even a blind pig can find a truffle" exists for a reason. Likewise, there are very skilled managers available in each of the groups above. The cyclicality of investment strategies mean that alpha can be generated by emerging managers in any strategy if market conditions are right. 

However, when it comes to structural alpha and cognitive alpha, the rubber hits the road. Structural alpha is created when a fund is young and small enough to be nimble, niche-y, under the radar, concentrated, etc. It would be extremely difficult, if not impossible, for a fund in the "billion dollar club" to exhibit these traits. Cognitive alpha, where a fund generates higher returns because the manager thinks and acts differently than the herd, isn't unheard of in the "billion dollar club," but it is exceedingly rare. Think about how many minority or women fund managers you know with more than $1 billion in AUM. 

Small and young funds may exhibit structural alpha and they are also more likely to have diversity managers at the helm that can contribute cognitive alpha. Women-run and minority-run funds may exhibit cognitive alpha, and they tend to be small and/or young funds, so may also display structural alpha. With alpha supposedly an endangered species in today's investing world, can investors really afford to ignore emerging managers? 

Thanksgiving Hiatus

The MJ Alts blog is on hiatus this week for the Thanksgiving holiday. I invite you to check out previous posts on topics like hedge fund failures, conference tips for managers, diversity investing and more while you slip into a L-tryptophan-induced coma. 

Next week the blog returns with a post about where to look for alpha. 

Emerging Manager 2015 Travel Planner

As emerging managers start thinking about capital raising for 2015, it's time to think about travel planning and investor meetings. Even though a recent survey of investors found that two-thirds are willing to meet with a manager in whom they don't plan to invest, who has time for that? To help you on your way, I've created this handy-dandy map of public fund emerging manager interest for your Expedia booking pleasure, along with some (hopefully helpful) notes below.

Arizona - Has made at least one investment in a large 'emerging' manager.

Arkansas - Teachers Retirement System reportedly tabled the program in 2008 but 2011 document shows active investments in MWBE managers. 

California - Looks for EM's based on size and tenure but prohibited by Prop 209 from looking at minority status or gender.

Connecticut - Based on size, minority status or gender. Awarded mandate in 2014 to Grosvenor, Morgan Stanley and Appomattox. 

Florida - Looks at emerging managers on equal footing with other managers. 

Hawaii - CIO has been historically pro-emerging manager. Plus, well, Hawaii.

Illinois - Perhaps the most active emerging manager state, based on gender, minority status and location. 

Indiana - Based on size, minority status, or gender. 

Kentucky - Reported $75 million allocation.

Maine - Has made at least one investment in a large 'emerging' manager.

Maryland - Very active jurisdiction with details available online for gender and minority status manager information.

Massachusetts- Includes size, minority status or gender. 

Michigan - $300 million program.

Missouri - Status based on size. 

Minnesota - Past investments in emerging managers. 

New Jersey - Status based on size. 

New York - Status based on size, minority status or gender. $1 billion mandate in 2014. $200 million seed mandate in 2014.

North Carolina - Status based on size and HUB (minority and women owned) status.

Ohio - Status based on size, minority status or gender. 

Oregon - Emerging manager program in place. 

Pennsylvania - Status based on size with preference for minority or women run funds.

Rhode Island - Plan in place from 1995.

South Carolina - Status based on size.

Texas - Actively engaged with emerging managers. Status based on size, minority status or gender.

Virginia - Status based on size, minority status or gender.

Washington - Has issued prior emerging manager RFPs. 

This information has been culled from some pretty extensive research, a host of conversations and, frankly, just knowing where some of the bodies are buried. Please remember that 'emerging manager" is a term that has a lot of definitions. There may still be minimum size requirements, minimum track record requirements and strategy restrictions.  I will update the map as I get more data. Happy hunting!

Look Both Ways

Throughout my childhood I owned and rode a bike. In the 70s and 80s, no one gave two figs whether I did so wearing a helmet or not. Seriously, we drank out of the garden hose and trick or treated at houses where we didn’t know people, too. Those were wild and crazy years.

In the 1990’s, however, someone decreed that biking was entirely too dangerous to be attempted without a helmet. I promptly stopped biking. For those of you that have met me, or who have even seen my picture, you probably recall one critical fact about my appearance: I have Big Hair Syndrome.’ And it ain’t fitting under a bike helmet.

Flash forward 20 years and we’re discovering some interesting facts about the bicycle helmet craze. In places where bicycle helmets were required by law, bike trips decreased by 30-40% across all demographic groups and by 80% across secondary school aged girls.

Unfortunately, when people gave up their bikes, they also gave up the health benefits of riding. One study by the Brits suggested that the health benefits (in terms of increased longevity) of riding outweighed the risk of injury by 20:1. A study done in Barcelona put this figure at 77:1. In Australia, they found 16,000 premature deaths caused by lack of physical activity dwarfed the roughly 40 cycling fatalities that occurred each year.

And that’s the curious thing about risk. You can focus on a single risk (in the case of biking, that a head-on collision will occur at 12.5 mph) to the exclusion of all else and actually increase your risk of other types of injury.

This is especially true in investments, where there is no single definition of risk. There are a multitude of risks against which to guard, and most of them have corresponding risks they introduce. For example, if you maximize the risk of illiquidity (the risk that you can’t get to your money when you need it) you may compromise returns. Private equity has been the best performing strategy over the last 10 years, but locks up capital for 5-10 years depending on the fund. Likewise, venture capital, which has been on fire for the last few years, has a 10 plus year lock up.  Requiring high liquidity restricts the types of investments you can make, which can impede diversification. More liquid investment structures can have lower returns than less liquid investments because they allow for people to trade at exactly the wrong times. Don’t you know someone who sold his or her mutual funds or index funds at the exact bottom of the market? In addition, there can also be a lower premium on more liquid instruments.

Or consider headline risk. Remember the Chicago Art Institute and Integral Capital? When Integral blew up and the Art Institute was a large, and the only, institutional investor in the fund, the headlines abounded. Since that time, there’s been an acknowledged risk of being in the headlines for losing money. For this reason, many investors stick to the same small group of funds so that they’re not alone should the ‘fit hit the shan.’ Unfortunately, this leaves a lot of smaller, less-well-known managers in the cold, and can compromise returns as well.  It also increases concentration in a small number of managers, funds and strategies.

And what about fee risks? Being ‘penny wise and pound foolish’ can block access to some of the most successful (read: non-negotiable) managers and funds. It can also cause investors to eschew entire asset classes (private equity, hedge funds) increasing correlations and concentrations and reducing diversification. Or what about the risk of not beating a benchmark like the S&P 500? Chasing returns is not very productive in the long run, and it can cause investors to take unnecessary risks in order to beat a rising benchmark. It’s also difficult to outperform on both the up- and down-side, so targeting outsize bull market returns can lead to bear market catastrophes.

In short, there’s no such thing as a free lunch. Protect yourself single-mindedly from one risk, and you just increase your odds of obtaining a different type of injury.

The Honey Badger

One night last weekend, I was in bed reading when I was distracted by a noise coming from the bookcase in my master bedroom. I heard a thump and then scratching. Convinced it was one of my pets messing with my suitcase, which was out and packed for a trip the next day, I ignored the sounds. Thump, scratch. Thump, scratch. Thump, scratch. Finally I sat up in bed to admonish my cat for being a pest, however I quickly noted that said cat was on the other side of the room. And he was staring intently at the bookcase.

Thump, scratch.

Thump, scratch.

When I got up to look more closely at the bookcase, the door actually opened a little bit. The thump of it shutting was followed immediately by scratching noises. I stared at the door. Thump, scratch. I wondered if I should open it and see what was in there. Thump, scratch. I was pretty convinced it was an animal. Thump, scratch. A squirrel perhaps. Thump, scratch. Maybe even a honey badger.

Thump, scratch.

Whatever it was, I was sure it had rabies.

Thump, scratch.

I called the wildlife removal company and asked if they could come in the morning. They assured me that they would be at my house at 8:00 am, and I went to bed downstairs – after taping the doors shut and barricading the rabid honey badger in the cabinet with an ottoman.

THUMP, SCRATCH!

The wildlife people came to my house after I left for the airport, but called me to report on their findings before my flight took off.

“Ma’am, we’ve contained the situation,” they said.

“Was it a honey badger?” I asked.

“No, ma’am. Your DVD player turned on and was trying to open, which bumped the door. Then it spun and scratched the door, before shutting and trying to open again.”

Yes, the wild animal in my house was a vicious DVD player.

Why am I telling you this pretty humorous but somewhat embarrassing story? Because every person to whom I’ve told the story in person asked me the same question: “Why didn’t you open the cabinet door and look?” My answer? At the end of the day, I knew I had two long-term solutions to the problem. Either the wildlife folks would show up in 24 hours and remove the critter, or it would die and I could safely remove it myself with gloves and a shovel. I didn’t need to act right away, and doing so could actually have caused more damage.

The same thing is going on in the markets right now. The thumps and bumps of market volatility have a lot of folks spooked. But some people are checkers – they look at what the market is doing daily and try to develop a short-term solution. They are convinced if they act now, they can save themselves from whatever may be lurking in the dark. Other people are waiters. These folks develop a long-term solution and trust that their plan will work out for them in a defined period of time.  I’ll let you guess who sleeps more soundly through the thumps and scratches.

The key to surviving volatility, hysterical commentators, and even market corrections (which will happen), is to have a long-term plan. To be able to disengage enough from the noises in the night to ask the following questions:

“Would I buy this stock/invest in this manager/choose this strategy today?”

“Has anything fundamentally changed with this stock/manager/strategy or is this purely market movement?”

“Do I need liquidity from this investment now or in the immediate future?”

“What conditions would need to be in place for these undesirable changes to become the new status quo? Are those conditions likely to occur?”

By logically thinking through what might be causing the noise, it is possible to develop and stick to a plan that reduces reactivity and focuses on long-term goals and objectives. After all, in the words of Warren Buffett, “In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”

 Don’t get me wrong. I am a fan of active investing and I’m not saying, “let it ride no matter what!” I am not, however, a fan of re-active thinking. I believe successful investments require discipline. And while you might jump when you hear noises in the market, you need a plan and conviction to avoid letting the rampaging honey badger into your portfolio.

Earworms and Investing

In 1965, the Byrds released Turn! Turn! Turn! The song’s lyrics were taken almost directly from Ecclesiastes and promises: “to everything there is a season.” After reading that Macro funds made an overdue performance comeback in September 2014, I walked around my office singing that hippie ditty all day. While it was an annoying earworm in less than an hour, after nearly four years of market gains, maybe we could all use a little repetitive reminder that investment strategies fall in and out of favor.

If you look at Hedge Fund Research’s top performing strategies for the last 14 years, for example, you can easily see where investors might have some short-term memory loss when it comes to performance. After all, the S&P 500 has taken top performance honors for the last 3 out of 4 years. If you look at the last decade, however, you can see that Emerging Markets strategies have been at the top of the charts for three years as well. In fact, the S&P 500 and Emerging Markets hedge funds have been as equally likely to lead the pack as to end up in the bottom half of investment strategies over the past decade. And Macro/CTA funds, which have been both maligned and heavily redeemed from in past months, were the number two performing strategy in 2007 and 2008 at the height of the financial crisis. Many investors were extremely happy to have allocations to those strategies at that time, and flows into CTA/Macro surged in the 12 to 18 months that followed the market meltdown. Interestingly enough, however, Macro’s top-notch performance was preceded by, you guessed it, bottom half performance rankings in the years immediately prior to the crisis.

And hedge funds aren’t the only alternative investments to fall into cyclical patterns.  While venture capital is positively on fire now, it has been a long road to recovery in the wake of the tech wreck. According to data from Cambridge Associates, US Venture Capital funds returned 26.1% over 15 years, but only 8.6% over the past 10 years and 7.5% over the past 5 years. Now venture capital is coming back with a vengeance, with a three-year return of 14.4%. There is even talk of a new VC bubble, which was probably pretty unimaginable just a few years ago.

Even private equity, which seems untouchable at this point, has its good and bad performance periods. With a 15-year return of 12.0%, according to Cambridge, a five-year return of 11.0% and a one-year return of a whopping 17.2%, private equity is clearly not immune to some degree of strategy cyclicality.

Why does this matter? We all have a tendency to chase winners and sell losers, whether they are strategies or managers, and even when we know that investment philosophy doesn’t often work. For example, a study by Commonfund Hedge Fund Strategies Group in August 2014 showed that chasing returns was not a long-term strategy for success. The study concluded that “there may be a natural tendency for hedge fund investors to gravitate toward managers that have captured a significant share of the market’s upside. However, since such equity upside capture is not common or persistent among hedge fund strategies, using it as a selection criterion may lead to adverse selection.”

Investing isn’t easy. It can be a fight against your instincts and ingrained behavior. So it’s healthy to take a moment every once and a while to remember that markets change and that strategies come in and out of favor. A relentless chase of returns is not only exhausting, but often suboptimal. And by definition, if you’re chasing returns, you’re already behind. 

Conference Savvy for Investment Managers

As part of my series on fund marketing, I thought I’d take a moment to talk about conferences. You can’t swing a dead cat without hitting a conference these days. There are events at least weekly, if not more often, all vying for your conference dollars and even more precious time. To maximize your conference experience, consider the following:

DO – Be choosy about conferences. Ask to see attendee lists (current or past, with contact info redacted if the organizer is touchy about sharing). Ensure that the audience matches your target demographic. Sometimes the only family office you will see at a conference is in the title of the event. Also, be aware of how many conferences you attend in a year. It was always a due diligence red flag for me if I saw a manager at too many events during a year, both from the perspective of expense management and time away from investments.

DO – Approach conferences with a battle plan. You should work an event like Sherman marching through Georgia. Make sure you get the conference attendee list with your paid sponsorship or registration and schedule meetings BEFORE the event. Have a target list of people you’d like to see in addition to your scheduled meetings. Bring your pitch book and one pager (if applicable) and plenty of business cards. If you are planning a dinner or lunch or golf outing, have the invites out at least 3 weeks in advance for maximum attendance.

DON’T – Stalk people. While this may seem counter to targeting attendees, there is a difference between seeking people out or asking mutual contacts for introductions and tailing people through an event. Once upon a time, there was a conference that offered homing devices to all attendees. It was not unusual to see an investor darting through the exhibit hall with 10 asset managers hard on their heels. It’s like Wild Kingdom - No one wants to be the antelope at the watering hole. Don’t approach people in bathrooms or lie in wait for them outside of lunches or other conference activities.

DO – Practice your elevator speech in advance. You need to be able to clearly articulate your value proposition in a NON-SALESY way. Rehearse a 2-minute and a 5-minute version. Role play with your colleagues how to seamlessly move from talk about a lunch speaker/panel/weather/golf outing into a quick summary of what you do.

DO – Ask questions when talking to your prospects. No one wants to hear a monologue about you or your firm. When practicing your elevator pitch, think of some questions to ask attendees to make the conversation more interactive. If you’ve done your homework on the attendees in advance this should be easy. Search Google for news or their website for RFPs and other information prior to the event.

DON’T – Commandeer your speaker spot (panel or standalone) to talk about your fund. Seriously. People will pass notes or text each other about you in the audience if you do this. Others may walk out. You’ll be known as “that speaker.” If you are lucky enough to get a speaking slot, think about how you can educate the audience. What is happening in the markets? What makes a particular investment strategy interesting? What is the outlook for a strategy? Always educate, never sell. Exception to the rule? Meet the manager, speed dating type of pitch events.

 DON’T – Sit behind your exhibit table if you have one. Stand up and move around in front of your exhibit so you can engage with people. If you sit, the only people that come up will be people that either know you or who want to have a serious conversation. You can miss more casual opportunities if you’re sitting down.

DO – Delegate effectively. If you aren’t a good public speaker and you have one in the firm, select him or her for speaking roles. If someone is better at marketing or capital raising, put them at cocktail parties or at the booth. There shouldn’t be a lot of ego involved in conferences – it’s a job function just like any other. Select the best person for roles to generate the most interest and effectively raise assets.

DO - Agree to follow ups during your conversations. The goal is to move the ball forward and have a plan (and buy in) to send follow-up emails including pitch books, monthly updates, commentary, white papers or other information. If you don't have a plan to continue forward momentum, you might as well not have gone to the conference at all. 

Stay tuned in November for more unsolicited fund raising advice!